Every economic decision has a moral consequence

24.06.2011 (All day)

"There is no such thing as an ethically neutral business leader." These were the words of Cardinal Tarcisio Bertone, Secretary of State, as he welcomed 100 global business leaders and academics to the Vatican for an Executive Summit on Ethics for the Business World.

The delegates, who represented a range of Christian denominations and the Jewish faith, shared a desire to find new ways to ground the ethical dimension of economic and business activity. The reference document of the Summit was Pope Benedict XVI's encyclical on the social teaching of the Catholic church, Caritas in Veritate (charity enlightened by truth), an intensely practical document that has gained a wide following as the springboard for ethical debate in business.

The Summit, which was held at the Papal Science Academy in the Vatican gardens, was hosted by the Pontifical Council for Justice and Peace, in collaboration with Fidelis International Institute and the Pontifical Athaneum Regina Apostolorum.

“Reason, by itself, is capable of grasping the equality between men … but it cannot establish fraternity” Pope Benedict XVI[1]

Commercial activity is essential to the common good, generating social benefits. It follows that the profit motive is legitimate. However, if profit becomes the exclusive goal, it risks destroying wealth and creating poverty.

Prof. Andy Zelleke (Kennedy School / Harvard University) described how, over the past 150 years, business leaders were deflected away from their role as stewards. As shareholder ownership dispersed, with shareholders exerting no control, management felt little accountability. The relentless pursuit of self-interest was sanctioned by public opinion because it drove financial performance. The ideology that stock markets accurately reflect corporate value (rather than other value factors) was known as Agency Theory, and this became the norm.

Prof. Daniel K Finn of Minnesota attacked another long held assumption. “The theory of rational self interested action does not explain the market place”, he said. “It is reciprocity that is at the heart of what it is to be a human being.” A history of reciprocity between two parties breeds trust and trust drives the market.

Today, lack of trust has led to a situation where transaction costs (including massive legal documents) are a major element in the cost of production.

Profits are for people, not people for profits

Stephen Ardsellof Deloitte agreed, quoting the encyclical: “The market needs ethics in order to function properly. And not any old ethics: ethics with man at the centre.” As a consequence, “all economic transactions should improve the situation of both sides” – a thought that is central to Islamic finance. There was a similar echo from Islamic finance when Paolo Ciocca (OECD) underlined two other principles: that a transaction must be fair and that it must be of benefit to the real economy.

A consequence of this view is that the individual cannot be forgotten in favour of the community. Prof. Stefano Zamagni (Bologna) gave his opinion that “to aim at the common good alone is not enough. Maximising GDP is not enough. The human is an individual. He must not be used.” This has implications in the corporate banking sphere. “If a company is a commodity that can be bought and sold at whim, then the employees are also a commodity,” he warned.

Of course, ethical drivers vary from continent to continent. Albert Chan of Ping An Insurance described Hong Kong as driven by the rule of law, the British educational system and anti-corruption. In the UK, institutional investors frequently collaborate on corporate governance issues whereas those in the US typically do not.

Speaking for the western economic markets,Lord Griffiths of Goldman Sachs identified three fundamental causes of the financial crisis - technical errors, ethical errors and cultural errors – the last two of which are tackled head on by the encyclical under discussion. Both he and Charles Lo, Chairman of of JaneClare Group (PRC/HK) see the search for common ethical standards not as a constraint but as a challenge: “Business has an opportunity to become a leader in this ethical vacuum,” said Mr Lo.

However, if “every economic decision has a moral consequence”, then it is ultimately the individual who is responsible for creating a new moral paradigm.

Morality demands more than the law requires

The Catholic church holds that each person, whatever the influences affecting him, remains the principal agent of his own success or failure. Only integrity offers protection from doing the wrong thing and this involves the use of conscience. But how do people develop a conscience?

Onno Ruding (chairman, Centre for European Policy Studies) pointed out that moral values are absorbed firstly within the family, then through religion, education and the surrounding culture and only lastly from the workplace.

Both the church and the universities therefore have a major responsibility. Professor Zelleke read out the Harvard Graduates’ Oath, an optional graduation vow, while Cardinal Turkson, responding to a question from a delegate representing the World Bank, confirmed that the Catholic church was ready to become a partner in financial educational programmes.

Company codes of conduct must be concrete and systematically applied, continued Mr Ruding, and since ethical decisions may affect the bottom line “where there is tension between profit and right”, it is essential that the culture run from top to bottom of an organisation.

Responsible stewardship of nature

Environmental responsibility was not central to the debate at the Summit but underlay many of the case studies. The view of the Christian church is consistent with its view of man as a whole. “Our duties towards the environment are linked to our duties towards the human person” states the encyclical. “Nature is prior to us and has been given to us by God as the setting for our life”. This demands responsible stewardship.

Clearly, a sustainable sharing of goods and resources has not been guaranteed by technical progress. In this area the Christian church brings an important ethical angle to the debate: the unity of the human race. We have a duty to share our wealth by creating jobs and sharing resources.

Walking the talk: ethics as a tool

Both Kenneth Resnick of GE and Gilles Denoyel of HSBC France, representing two global companies, stressed the importance of company-wide staff training in ethics and decision making and the necessity for zero tolerance towards bribery. By refusing to collaborate in corruption, companies are promoting the rule of law in the countries where they are engaged, pointed out Mr Resnick.

One of the most heart-warming and illuminating aspects of the Summit was the examples given by CEOs of actual situations of moral conflict and how they had dealt with them. The examples cited below are just a handful of them.

Ines Kolmsee, CEO of SKW (steel sector, production in 16 countries)

USA: In 2008 her order book emptied in the space of 2 weeks. Ms Kolmsee was obliged to lay off staff but chose to pay out full bonuses and continued paying healthcare payments. Within 6 months all were successfully re-hired.

India: The company purchased a construction site with a mortality-rate of 3-5 p.a. Having implemented German safety standards (barriers included costs, languages and the heat), in the first year there was only 1 minor accident.

Eberhard von Koerber, Club of Rome, formerly of BMW

South Africa, 1981: Angry reaction in Germany and the USA to BMW’s decision to build a plant in apartheid South Africa. But BMW was able to negotiate unprecedented conditions: equality of pay, black foremen and non segregation of facilities. 2000 staff were employed, of whom 100 high potential staff were trained in Bavaria.

Ofra Strauss, CEO of Strauss (Israel, active in 20 countries)

Her policy of full transparency, for instance by publishing the carbon footprint of the company, and efforts to promote gender/religious diversity at Board level led to both applause and personal criticism.

Xavier Autrey (Mexico, mining. 20,000 employees)

During the financial crisis the company had to shut down 40% of capacity. However, staff were diverted to maintenance work at other plants.

These stories, and others, reflected real situations where the CEO took a decision that in many cases resulted in short term loss of profit and in most cases gave no guarantee of future reward. They underline the truth of Pope John Paul II’s comment about globalisation : “Globalisation, a priori, is neither good nor bad. It will be what people make of it”.

The status quo is not an option

Fidelis International Institute and the Athaneum Regina Apostolorum shared the difficult task of summing up the debate and reaching conclusions.

Father Michael Ryan LC noted that delegates were “positive and enthusiastic about the coexistence of money and ethics”. However,“ethics has weaked itself by engaging weakly, without intellectual vigour.” Society must aim at “a higher goal” he concluded, by adopting new principles:“Good ideas are contagious.”

Since Humanity has a common goal, the principles must be universal.

The dignity of the human person

The common good

Solidarity

Subsidiarity

How can such a shift in culture be achieved? Incorporated into Best Practice, these principles will yield habits such as trust and reciprocity, appropriate incentive schemes and ethics applied creatively as a tool (not a constraint).

Role models, publicised by a supportive media, will influence the academic world, driving research and educational programmes. This is the critical phase, where examples of early adoption lead to widespread attraction and finally to an “inflection point” of broad acceptance and a change of culture.

The role models are business leaders who must accept the often lonely road of conscience:

taking responsibility for all stakeholders

avoiding speculative and unfair use of resources

creating jobs

recognising that morality sometimes demands more than the law

recognising that profit is for people, not people for profit.

Closing the Summit, Cardinal Peter Turkson, President of the Pontifical Council for Justice and Piece, concluded that the use of conscience was not limited to executives, but extended to owners and shareholders, workers and their families. He warned delegates against leaving the summit not just with a “bag full of inspiring ideas and good suggestions” but with a real To Do agenda. ER

[1] Quotes not otherwise attributed are from Caritas in Veritate by Pope Benedict XVI

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